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The current Taiwan Patent Act (Subparagraph 2, Paragraph 1, Article 85) stipulates that a patent owner may opt to calculate damages incurred based on "the profits earned by the infringer from the infringement," and additionally provides that: "If the infringer fails to prove the costs or necessary expenses, the total income acquired from the sale of the infringing goods shall be regarded as the earned profits." In other words, the patent owner may also choose to assume "the total income generated from the infringer's sale of the infringing goods" as the basis of calculation. In attempting to reduce liability for compensation, the infringer bears the burden of proof regarding "costs" and "necessary expenses." Legal scholars in Taiwan refer to these two calculation methods as "Total Profits Method" and "Total Sales Income Method," respectively.
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In patent litigation, it is common practice for the patent owner (the plaintiff) to choose the total income of the infringer (the defendant) generated from the sale of infringing goods as the basis for calculation of damages. During the litigation, the defendant typically responds by submitting evidence of costs or necessary expenses to be deducted, and the court determines the final amount of damages after hearing debate between the parties. The lack of sophisticated regulations in the Patent Act gives motivation for argument over what kinds of costs or necessary expenses qualify for deduction from sales income earned from the infringing goods, which often becomes one of the main topics of debate. Furthermore, as the concepts of "profits," "costs," and "expenses" have counterparts under accounting principles, divergent interpretations of these terms and concepts are frequently expressed by the two parties during presentation of arguments. Meanwhile, the court lacks clear guidelines for rendering a decision.
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Following the establishment of the Intellectual Property Court in July 2008, there have been only a limited number of cases where the patent owner prevailed and was granted a damage award, so the Court is still shaping its opinion regarding methods of damage calculation and related principles. Examples of cases where the Intellectual Property Court has expressed opinions concerning the "costs" and "necessary expenses" deductible from the infringer's income earned from the sale of infringing products include the following judgments:
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Judgment 2009-Min-Zhuan-Shang-57 (March 2011)
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Regarding the reason that the Patent Act allows the plaintiff to select either the "total sales" or the "profit earned" of the infringer as the damage amount, the legislative intent is to decrease the burden of proof to be borne by the patent owner and to impose certain punitive effects on the infringer. Hence, to prevent the unreasonable outcome that "the infringer may be exempted from the liabilities of infringement because the infringer's company generates no profits or even generates debts," the "costs" and the "necessary expenses" deductible shall be limited to the manufacturing costs and the required expenses directly incurred by the infringer for the sale of infringing products and shall not be expanded to other costs and expenses incurred by the infringer for the operation of his/her business, or even the so-called "R&D costs."
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Judgment 2010-Min-Zhuan-Su-219 (May 2011)
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The "profits earned from infringement" shall refer to the infringer's net profits, which are calculated by deducting the necessary costs and necessary expenses for the implementation of patent infringing activities from the gross profits acquired by the infringer. The scope of production costs covers fixed costs and variable costs. The material costs of the infringer's goods are variable costs and can be deducted from the operating income (VAT excluded) acquired by the defendant from the sale of the goods. On the other hand, the value of fixed costs is fixed and does not change with production volume; hence, while conducting cost analysis to calculate the damages caused by patent infringement, only the variable costs necessary for the additional sale shall be deducted. Fixed costs shall be excluded.
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In the aforementioned Judgment 2010-Min-Zhuan-Su-219, the Intellectual Property Court stated that the "profits earned from infringement" means "the net profits attained by deducting costs and required expenses from the gross profits"; in other words, net profits are adopted as the basis rather than gross profits. From the rationale of the judgment, it seems that "gross profits" would be considered to mean the infringer's sales income acquired from after tax sales of infringing goods. The Intellectual Property Court expressed similar opinions in its Judgment 2010- Min-Zhuan-Su-147 in July 2011 and Judgment 2010)-Min-Zhuan-Su-215 in August 2011.
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In a 2012 judgment, however, the Intellectual Property Court offered a divergent opinion by adopting "gross profits" as the basis of "profits earned from infringement":
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Judgment 2011-Min-Zhuan-Su-64 (January 2012)
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The Patent Act does not explicitly define what the "costs" and "necessary expenses" are. By referring to accounting definitions of direct costs and indirect costs, direct costs means traceable costs, i.e. the costs that could be directly identified or attributed to specific objectives (e.g. to a specific department or product). Indirect costs mean the costs that could not be directly identified or attributed to specific objectives, and hence must be amortized through specific methods. The costs and the required expenses stipulated in Subparagraph 2, Paragraph 1, Article 85 of the Patent Act are similar in meaning to the accounting concept of direct costs but exclude indirect costs. Hence, where the infringer could prove the costs and necessary expenses, the damages calculated on the basis of profits earned from infringement are usually the gross profits as understood in accounting rather than the net profits or after tax net profits with indirect costs or taxes deducted.
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In its Judgment 2011-Min-Zhuan-Su-64, the Intellectual Property Court also detailed the differences in nature between accounting and law. It stated that even if a cost could be appraised as a direct cost in accounting, it is not always admissible to recognize it as a direct cost deductible from the income generated by the infringer from legal perspectives. Using the example of "payroll costs," the Court explained that while accounting principles might allow for payroll to be considered as a direct personnel cost, allowing the infringer to deduct salary from acquired income would literally mean that the patent owner is required to pay salary to persons manufacturing infringing products on behalf of the infringer, which would certainly be unreasonable.
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During the nearly four years since its establishment, the Intellectual Property Court has been frequently questioned for the low rate of success of patent owners in litigation. Although its recent decision in the aforementioned judgment 2011-Min-Zhuan-Su-64 adopted a perspective favorable to protection of patent owners by supporting a rationale for defining "gross profits" as the basis of damage calculation, it remains to be seen whether this opinion will eventually be validated by the Supreme Court and become implemented under guidelines.
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Moreover, in Paragraph 2, Article 97 of the new Patent Act, which is expected to be formally implemented by the end of 2012, the calculation method "total sales income" has been deleted; only the "total profits" standard remains. Furthermore, the new Patent Act no longer stipulates that "the infringer shall prove the costs and the necessary expenses." After the new Act is implemented, it will be important to monitor whether it becomes more difficult for a patent owner to claim damages, and to observe how the Intellectual Property Court deals with the issues of damage calculation and the distribution of burden of proof.
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